28/11/2019 | EIFR
“It’s fair to say that Mifid II is almost like the air we breathe: it’s so prevalent in
everything, that it’s inherently a topic of every discussion,” a City lawyer told
Practice Insight recently.
Totalling more than a million paragraphs, the EU directive touches practically
every area of financial services, from communication with clients to the
classification of instruments.
“I believe in the perfectibility of the regime, but it’ll be a long time until it’s
perfected,” said Nathaniel Lalone, partner at Katten in London. “I think regulators
have done a good job at identifying the key issues, but it remains to be seen
whether changes will actually be successful or will only create more issues.”
Last week, the European Securities and Markets Authority (Esma) chair Steven
Maijoor laid out the key aspects of Mifid II’s review in a public address in
Frankfurt. This followed the publication of a series of papers on necessary
amendments and revisions to the directive by German industry watchdog BaFin
over the summer.
“While [some] achievements are certainly positive, we also acknowledge that
there are areas where improvements may need to be considered to ensure that
Mifid II delivers on its objectives and is applied in a convergent manner across the
EU,” said Maijoor during his address.
See also: How Mifid II is slowly killing the trade
Two years into the regime’s application, the industry has showed a high level of
discontent towards a number of rules.
“I haven’t given up on Mifid II,” said Jason Waight, head of regulatory affairs and
business management at electronic bond trading platform MarketAxess.
“However, it clearly hasn’t yet fulfilled the goals outlined by regulators. We may
need to give it more time to see how that transforms in the future.”
BaFin’s position papers set out two sides for the review: one focusing on revisions
to secondary market provisions in Mifid and Mifid II, and the other on
amendments to investor protection provisions in Mifid and the Packaged Retail
and Insurance-based Investment Products (Priips) regulation.
“While we’ve already made significant steps in improving investor protection and
transparency, there’s still room for a more differentiated approach on consumer
profiling,” Elisabeth Roegele, chief executive director of securities supervision and
deputy president at BaFin, told Practice Insight.
The German regulator proposes a two-step approach to the review process,
identifying near-term corrections of minor, mainly technical deficiencies within
the coming months, followed by further work by the European Commission on
more fundamental contentious issues based on in-depth analysis.
“Given the scope of Mifid II, it seems like a common-sense approach to be dealing
with one issue at a time,” said Scott Duxbury, co-founder at investment research
and management platform Nucleus195, and former head of EMEA equity trading
at Merrill Lynch. “I would hope they prioritise the most important market
For BaFin, areas that require near-term corrections in the coming months
include: share trading obligation scope, consistency in deferred post-trade
publication of non-equity instruments, access requirements for exchange-trade
derivatives (ETDs), and exemptions from pre and post-trade transparency
requirements for central banks.
See also: Mifid II increases depression and inequality across the
The position papers resulted from a public consultation led by the German
ministry of finance a year into Mifid II’s implementation. According to BaFin, ‘the
findings of the consultation [did] not reveal a need for a comprehensive review of
secondary market provision…but [did] show a great deal of discontent with
several requirements…and a desire for an early refit covering [these].’
The market reportedly also criticised the breadth of Mifid II, as well as the short
timeframe – while it was years in the making and postponed, certain key
regulatory technical standards were released incredibly late – and costs related to
its implementation and insufficient coordination with other legislations.
‘In the future, more attention should be given to ensuring the proportionality of
provisions, along with sufficient dynamic implementation periods of at least 18
months following the publication of relevant level two provisions,’ BaFin further
The idea of improved proportionality appears to be popular among industry
“I’m sure the industry would welcome a reassessment on the proportionality of
many of the reporting regimes, and a clarification on how regulators are currently
using all data elements,” said David Nowell, senior regulatory reporting specialist
at Kaizen Reporting.
While revisiting reporting regimes may sound like a worthy aim, one should
remember that each regime has different drivers, he added.
See also: Emir v Mifid II: clearing and trading obligations align
“The main driver behind Mifid II transaction reporting is market abuse detection,
while for Emir [European Market Infrastructure Regulation] it’s systemic risk,” he
said. “There are very good reasons why the regimes can never be fully harmonised
– and there is a danger that this could detract from the real need to simplify the
reporting regimes, making them more proportionate.”
Others, however, do believe that harmonisation should be a key aspect of the
“There are six or seven regulations and directives at EU level that require the
reporting of largely similar information, but using different formats or
repositories,” said Katten’s Lalone. “Rationalising reporting regimes would
probably be the single thing that would make market participants’ lives much
easier, and as such, it should really be at the top of the regulators’ list.”
The Futures Industry Association (FIA) has also been a fervent advocate of better
harmonisation in this area.
“Whether it’s Mifid, Emir, SFTR [Securities Financing Transactions Regulation]
or SSR [Short-Selling Regulation] – there is a great variety of reporting regimes,
and we’re calling for their harmonisation,” a spokesperson at FIA said. “We
support the outcomes highlighted through BaFin’s consultation paper, and look
forward to providing Esma with feedback on position limits, transactions
reporting, market data and other important issues throughout Mifid’s review.”
While Maijoor admitted that Mifid II still needs work, he also pointed out where it
has had a positive effect.
He explained that in Esma’s experience, the regime has already helped to improve
transparency in financial markets, with rules in asset classes such as exchangetraded
funds (ETFs) and derivatives subject to the trading obligation having had a
positive impact on the market as a whole.
“Anecdotal evidence suggests that liquidity in ETFs has increased markedly,” said
Maijoor. “At the same time, areas such as bond market transparency aren’t quite
MarketAxess’s Waight agreed. “Mifid II did bring transparency to the fixed
income market for the very first time,” he said. “And it has built a framework for
that, but there isn’t yet enough transparency in the bond market because of how
it’s been calibrated. This will need to be reviewed.”
See also: Industry has lost interest in Mifid II
The regime has also begun to deliver on its goal of moving more transactions onto
regulated trading venues, according to Maijoor. Around 83 EU-based organised
trading facilities (OTFs) now allow the execution of transactions on-venue as
opposed to over-the-counter.
While bonds are increasingly traded on venues, other parts of the market are still
“A positive impact for us has been the rising use of electronic trading,” said
Waight. “The shift had already begun beforehand, but Mifid II has probably acted
as a catalyst.”
Mifid II has also brought more information to clients on costs and charges of
products and services, helping them to make more informed investment
decisions. A stronger supervisory focus and new product governance
requirements have meanwhile emphasised the responsibility of firms and their
Esma has recommended a gradual approach for Mifid II’s review to the
Commission, with the delivery of follow-up review reports staggered over time.
A review of investor protection rules such as inducements and product
intervention is, for instance, set to be completed by March 2020.
“Consumers still struggle to perceive the importance of cost disclosures and the
impact of inducements,” said Maijoor. “Nonetheless, Esma’s report on investment
products’ cost and performance has widely confirmed how impactful costs are on
See also: Mifid II’s systematic internalisers disagree on nearly
A review report on the cost of market data and the creation of an equity
consolidated tape – a measure that many so far perceive as a failure – is already
well under way and will be submitted to the Commission next month.
“Most data users concurred with Esma’s analysis that Mifid II hasn’t delivered on
its objective to reduce the price of market data so far, [raising concerns] that
trading venues increased market data prices and introduced new types of fees
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over the last two years,” said Maijoor.
A comprehensive review report assessing Mifid’s transparency regime is also in
the works and should cover many issues, including equity and non-equity
transparency rules, double volume caps, the derivative trading obligation and
“The focus on transparency will be welcomed by many,” said Tim Cant, partner at
Ashurst. “Many transparency provisions and their associated rules weren’t
thought through properly, which led to confusion and mixed market practice. An
example of these are tick-size regimes on instruments with primary listings
outside the EU.” Cant also agreed that market data is a key element for review.
A similar sentiment concluded Maijoor’s speech in Frankfurt last week. “As you
can see, there remains a lot of work ahead for us,” he said. “I think I am not wrong
in predicting that work on market data will remain an important topic for the
years to come.”